There is a growing recognition that stringent local land-use regulations are one of the main barriers to upward mobility for low- and middle-income Americans. In a new Democracy Journal review of Thomas Piketty’s Capital in the Twenty-First Century, Lawrence Summers, a veteran of the Clinton and Obama administrations and one of America’s most influential economists, argues that “the two most important steps that public policy can take with respect to wealth inequality are the strengthening of financial regulation to more fully eliminate implicit and explicit subsidies to financial activity,” a widely-held view, and, more surprisingly, “an easing of land-use restrictions that cause the real estate of the rich in major metropolitan areas to keep rising in value.” It shouldn’t be too surprising that Summers takes this view, as he is a colleague of Edward Glaeser, the Harvard economist who has arguably done more than anyone else to put the perverse effects of excessive local land-use regulation on the map.
Encouragingly, a new report from the U.S. Chamber Foundation connects the regulatory climate to housing prices: it turns out that more entrepreneurship-friendly jurisdictions tend to have lower housing prices, as these jurisdictions generally make it easier to obtain construction permits. And Jay Weiser, a professor of law and real estate at Baruch College, recently discussed the ways in which local land-use regulations exacerbate poverty at the AEI Ideas blog:
As Louis Hyman noted in his book Debtor Nation, government-subsidized debt pressured low-wealth families to borrow for houses and cars rather than build up savings. With Southern California’s low permitted densities and vast distances – Riverside County and its Inland Empire neighbor, San Bernardino County, together are larger in area than West Virginia – public transportation is impractical, and many low-wage jobs don’t pay enough to justify the time and expense of commuting. The guarantee state, by encouraging high consumer leverage to acquire illiquid, oversized, high-maintenance houses, ironically heightened the inequality bemoaned by progressives. When highly leveraged, low-wealth homeowners lose a job or need to do extensive home or auto repairs, they get wiped out. Renters are in a better position to build long-term wealth through diversified savings.
Brookings Institution scholar Alan Berube (an author of a suburban poverty study) says of the Inland Empire, “This is where poor people live now, and this is where they are going to live.” But Berube’s incantation makes an eternal truth out of reversible government decisions that created sprawl. Raising densities and ending the preference for single-family homes could reconcentrate people near viable working-class jobs in places like Los Angeles.
This is a theme that we’ve addressed in this space as well, and I was pleasantly surprised to find that at least some conservative state legislators are thinking along broadly similar lines. That is, while the left fixates on setting higher and higher statutory wage floors, the right needs to think harder about the sources of the cost growth in housing, medical care, and other domains that are eating into disposable income and making it difficult if not impossible for people of modest means to build wealth and to improve their standard of living. Though conservatives and libertarians have yet to translate these inchoate concerns about the ways in local land-use regulation can limit opportunity into a policy agenda, we’re in a much better position now than we were in as recently as a few years ago. The tide is turning.
I should add that Karen Weise of Bloomberg Businessweek has more on the housing beat. She reports that though “the most direct route to keep prices in check is to create more supply,” the housing construction recovery “mostly isn’t in areas facing the biggest squeeze.” Even when high-cost metros are building more than usual, they’re not keeping pace with the national average. Weise cites Jed Kolko, chief economist at Trulia, who observes that because high-cost cities tend to have geographic limitations that limit the scope for housing construction, their main option for increasing supply is building denser projects, featuring taller multi-family dwellings with smaller units. But the political barriers are steep, as Kolko explains to Weise. While the negative externalities associated with construction are very visible, as are changes to the character of the built environment that longtime residents might find distasteful, “the benefits of greater affordability are more diffuse, shared across a whole metro area and often delivering the most help to residents of the future.” Moreover, incumbent homeowners benefit from supply constraints that force housing prices to increase.
Where Weise goes astray is in suggesting that “if people earn more, high housing prices are less of a problem,” and all but endorsing a minimum wage hike as a viable strategy for addressing the affordability crunch. This is disappointing in light of the sanity of the rest of the piece. Leaving aside the question of whether raising local minimum wages will reliably lead to higher incomes rather than to more substitution of capital for labor, etc., why would higher incomes resolve the affordability crunch if housing supply remains tightly constrained? Would higher incomes in a given region mean more money chasing after a limited supply of housing units? There is no getting around the need to increase housing supply.
And instead of just acknowledging the political barriers to new development in high-cost cities, it is worth noting that scholars like David Schleicher of the George Mason University School of Law have devised ingenious ways around them, like TILTs or “tax increment local transfers.” The basic idea is that if a local community approves a zoning amendment that allows for increased density, residents of the community would get a cut of the new tax revenues generated by the new construction for some limited period of time. This time limit creates an incentive for local residents to want develop to happen quickly, as the clock starts ticking once permission to build is granted. Whereas community opposition to development now means that developers have to pay ever larger bribes, or “community benefits agreements,” to get their projects built, TILTs create a situation in which community opposition, and the delays it creates, shrink the period during which community residents get their cut of tax revenue. In effect, TILTs force NIMBYs to make a difficult choice: they can either be their NIMBY selves and not get paid, or they can go from a “not in my backyard” stance to a “yes in my backyard” stance and secure cold, hard cash, or other local benefits, in the process.
Schleicher is too modest to say that he’s solved the NIMBY problem. But he’s certainly made some headway.